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Greece
The unblocking of the second bailout should ensure that Greece is financed out to 2014. However, there may be some
disappointments regarding the assumptions underpinning this second programme. We expect the recession to be longer
and more severe than expected by the EU and the IMF. Public finances are likely to improve but not at the pace or on the
scale provided for in the programme. Additionally, the results of the upcoming general elections could add to the political
uncertainty. The stricter supervision provided for in the programme should however ensure that the reforms are
implemented. All in all, despite episodic tensions, we expect to see an overall improvement in the country’s situation over
the next few years, which should ensure the eurozone’s support over the medium term.
Act II
Second bailout
Following the successful debt restructuring deal (Private Sector Involvement,
PSI) and the adoption of new conditional measures, Greece will receive a
second rescue package of EUR 172.7 billion. Of this amount, EUR 164.5
billion will be available to finance the Greek government out to 20141. The
eurozone countries will contribute EUR 144.7 billion through the European
Financial Stability Facility (EFSF). The IMF will contribute the balance and has
undertaken to lend an additional EUR 8.2 billion after 2014. These funds will
mainly cover three borrowing requirements: the fiscal deficit, debt repayments
and the cost of the PSI2. The first two borrowing requirements are assumed to
be significantly reduced from 2012-2014. First of all, the fiscal deficit will
benefit from the assumed return to a primary fiscal surplus in 2013. The
Greek government will supposedly achieve a cumulative primary fiscal surplus
of EUR 11.1 billion between 2012 and 2014. Additionally, interest expenses
will be reduced thanks to the cancellation of debt under the PSI deal and the
reduced interest rates agreed, both by private-sector creditors on the bonds
swapped and by the eurozone countries on the loans extended under the first
bailout package. All in all, the fiscal deficit is expected to represent a
borrowing requirement of EUR 21.3 billion. Lastly, the debt repayment
schedule has also been lightened. Repayment of the principal of the new
Greek bonds arising from the PSI deal will start in 2023 (Chart 2) while
repayments of the EFSF loans will begin in 2020. Therefore, up to 2014, only
the debt held by the ECB (under the Securities Market Programme, SMP), the
IMF loan under the first bailout package and some other loans such as those
granted to the government by the Greek central bank will need to be repaid.
These represent a borrowing requirement of EUR 59.9 billion.
The bulk of borrowing requirements relates to the PSI and the recapitalisation
of Greek banks. In exchange for the debt swapped, the private sector
creditors that voluntarily participated in the swap received EFSF securities for
a total of EUR 29.5 billion (around 15% of the approximately EUR 200 billion
of debt swapped). This means that, when swapping its debt, the Greek
government took out a EUR 29.5 billion loan from the EFSF, which it then
used to compensate its creditors. In addition, recapitalising the banks will
create an additional borrowing requirement, estimated at EUR 48.8 billion, of
which part is linked to the PSI deal.
Out to 2014, the Greek government’s total borrowing requirements are
estimated at EUR 178.6 billion. They will be covered by an EU-IMF loan of
EUR 164.5 billion and by receipts from privatisation, which is expected to
bring in a total of EUR 12 billion over the period. On top of this, it is assumed
that an additional revenue of EUR 2.2 billion will come from retrocession to
the Greek government of the profits made by the Eurosystem (ECB and
national central banks) on its portfolio of Greek bonds (Official Sector
Involvement, OSI). In theory, the financing programme is therefore completed
out to 2014. However, it does not allow for any shortfall in terms of fiscal
performance and/or receipts from privatisation.
The sustainability of public finances
The ultimate aim of the second bailout plan is to restore Greece’s solvency so
that it can return to the capital markets. In the short term, despite the PSI, the
public debt ratio is expected to remain virtually unchanged, dropping from
165% of GDP in 2011 to 163% in 2012, based on the assumptions of the
programme. Although debt cancellation has reduced the stock of Greek debt,
the PSI costs referred to above, combined with a severe and lasting recession
and a high fiscal deficit will stand in the way of any reduction in the public debt
ratio, and will even push it up to 167% of GDP in 2013. Over the medium
term, under the combined effects of renewed economic activity (average
annual growth rate of 2.7% from 2014 to 2020) and substantial primary fiscal
surpluses (4.5% of GDP in 2014-2020), the public debt ratio could be brought
down to 117% of GDP in 2020 (chart 3), which the IMF considers to be a level
compatible with a return to the capital markets. However, many risks weigh on
this scenario (Table 4).
A risky scenario
First of all, Greece’s recession could be longer and more severe than
expected. The wage deflation (in particular the 22% reduction in the minimum
wage) needed to regain competitiveness is likely to lead to a sharp fall in
private consumption in 2012 and 2013 while investment will probably be held
back by highly restrictive financial and monetary conditions. Also, the informal
economy could well grow further against a backdrop of falling income and a
growing tax burden. Exports account for less than a quarter of GDP and are
not large enough to offset the fall in domestic demand. The macroeconomic
framework of the EU-IMF programme is based on forecasts of a recession of
4.8% in 2012 followed by stabilisation in 2013, whereas our forecasts are for a
contraction of 5.2% in 2012 followed by a contraction of 1.1% in 2013. Over
the medium term, there is also the question of Greece’s potential growth. The
estimate of potential growth set out in the programme is around 2.5% a year
based on strict application of the structural measures designed to boost
competitiveness and employment. However, it might be lower. For nearly a
decade, activity in Greece was artificially boosted by the low interest rates
linked to eurozone membership. Soaring public and private debt fuelled an
unsustainable level of GDP growth driven by domestic demand. The present
changeover to growth driven by supply and exports could result in a
permanent loss of activity: the businesses currently closing down in Greece
may never reopen thereby leading to a rise in structural unemployment and a
downward revision of the country’s potential growth.
The risks to growth are closely linked to those weighing on the fiscal
performance. The programme is based on the return to a primary fiscal
surplus in 2013 growing to 4.5% of GDP in 2014, remaining that large out to
2020. Although recent history shows that such an adjustment is possible 3, it
necessarily supposes a strong enough economic recovery to support the
cyclical improvement in public finances. After an impressive fiscal
consolidation of 5 percentage points in 2010, the fiscal deficit was reduced by
only 1.3 percentage points in 2011, to 9.3% of GDP. The brutal recession has
reduced the scope of the austerity measures. However, while Greece has
missed its target in terms of results it has also fallen short of the target in
terms of means employed. The government has not implemented all the
measures it undertook to implement. For example, the tax reform initially
scheduled for September 2011 has been postponed to June 2012.
The political uncertainty should be put into perspective
The results of the upcoming general elections (probably to be held in May) are
very uncertain. At the moment, no single party appears to be in a position to
win enough votes to govern alone. The opinion polls point to a very scattered
Parliament and the likely formation of a very mixed coalition whereas a great
deal depends on the future Greek government’s ability to implement the
measures provided for in the programme. However, the closer supervision,
with European auditors positioned permanently in Athens, reduces the relative
importance of this political uncertainty. Stricter control of the implementation
of the measures should pave the way for an improvement in the country’s
overall situation and, accordingly, ensure the eurozone’s financial support
over the long term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Greece
The unblocking of the second bailout should ensure that Greece is financed out to 2014. However, there may be some
disappointments regarding the assumptions underpinning this second programme. We expect the recession to be longer
and more severe than expected by the EU and the IMF. Public finances are likely to improve but not at the pace or on the
scale provided for in the programme. Additionally, the results of the upcoming general elections could add to the political
uncertainty. The stricter supervision provided for in the programme should however ensure that the reforms are
implemented. All in all, despite episodic tensions, we expect to see an overall improvement in the country’s situation over
the next few years, which should ensure the eurozone’s support over the medium term.
Act II
Second bailout
Following the successful debt restructuring deal (Private Sector Involvement,
PSI) and the adoption of new conditional measures, Greece will receive a
second rescue package of EUR 172.7 billion. Of this amount, EUR 164.5
billion will be available to finance the Greek government out to 20141. The
eurozone countries will contribute EUR 144.7 billion through the European
Financial Stability Facility (EFSF). The IMF will contribute the balance and has
undertaken to lend an additional EUR 8.2 billion after 2014. These funds will
mainly cover three borrowing requirements: the fiscal deficit, debt repayments
and the cost of the PSI2. The first two borrowing requirements are assumed to
be significantly reduced from 2012-2014. First of all, the fiscal deficit will
benefit from the assumed return to a primary fiscal surplus in 2013. The
Greek government will supposedly achieve a cumulative primary fiscal surplus
of EUR 11.1 billion between 2012 and 2014. Additionally, interest expenses
will be reduced thanks to the cancellation of debt under the PSI deal and the
reduced interest rates agreed, both by private-sector creditors on the bonds
swapped and by the eurozone countries on the loans extended under the first
bailout package. All in all, the fiscal deficit is expected to represent a
borrowing requirement of EUR 21.3 billion. Lastly, the debt repayment
schedule has also been lightened. Repayment of the principal of the new
Greek bonds arising from the PSI deal will start in 2023 (Chart 2) while
repayments of the EFSF loans will begin in 2020. Therefore, up to 2014, only
the debt held by the ECB (under the Securities Market Programme, SMP), the
IMF loan under the first bailout package and some other loans such as those
granted to the government by the Greek central bank will need to be repaid.
These represent a borrowing requirement of EUR 59.9 billion.
The bulk of borrowing requirements relates to the PSI and the recapitalisation
of Greek banks. In exchange for the debt swapped, the private sector
creditors that voluntarily participated in the swap received EFSF securities for
a total of EUR 29.5 billion (around 15% of the approximately EUR 200 billion
of debt swapped). This means that, when swapping its debt, the Greek
government took out a EUR 29.5 billion loan from the EFSF, which it then
used to compensate its creditors. In addition, recapitalising the banks will
create an additional borrowing requirement, estimated at EUR 48.8 billion, of
which part is linked to the PSI deal.
Out to 2014, the Greek government’s total borrowing requirements are
estimated at EUR 178.6 billion. They will be covered by an EU-IMF loan of
EUR 164.5 billion and by receipts from privatisation, which is expected to
bring in a total of EUR 12 billion over the period. On top of this, it is assumed
that an additional revenue of EUR 2.2 billion will come from retrocession to
the Greek government of the profits made by the Eurosystem (ECB and
national central banks) on its portfolio of Greek bonds (Official Sector
Involvement, OSI). In theory, the financing programme is therefore completed
out to 2014. However, it does not allow for any shortfall in terms of fiscal
performance and/or receipts from privatisation.
The sustainability of public finances
The ultimate aim of the second bailout plan is to restore Greece’s solvency so
that it can return to the capital markets. In the short term, despite the PSI, the
public debt ratio is expected to remain virtually unchanged, dropping from
165% of GDP in 2011 to 163% in 2012, based on the assumptions of the
programme. Although debt cancellation has reduced the stock of Greek debt,
the PSI costs referred to above, combined with a severe and lasting recession
and a high fiscal deficit will stand in the way of any reduction in the public debt
ratio, and will even push it up to 167% of GDP in 2013. Over the medium
term, under the combined effects of renewed economic activity (average
annual growth rate of 2.7% from 2014 to 2020) and substantial primary fiscal
surpluses (4.5% of GDP in 2014-2020), the public debt ratio could be brought
down to 117% of GDP in 2020 (chart 3), which the IMF considers to be a level
compatible with a return to the capital markets. However, many risks weigh on
this scenario (Table 4).
A risky scenario
First of all, Greece’s recession could be longer and more severe than
expected. The wage deflation (in particular the 22% reduction in the minimum
wage) needed to regain competitiveness is likely to lead to a sharp fall in
private consumption in 2012 and 2013 while investment will probably be held
back by highly restrictive financial and monetary conditions. Also, the informal
economy could well grow further against a backdrop of falling income and a
growing tax burden. Exports account for less than a quarter of GDP and are
not large enough to offset the fall in domestic demand. The macroeconomic
framework of the EU-IMF programme is based on forecasts of a recession of
4.8% in 2012 followed by stabilisation in 2013, whereas our forecasts are for a
contraction of 5.2% in 2012 followed by a contraction of 1.1% in 2013. Over
the medium term, there is also the question of Greece’s potential growth. The
estimate of potential growth set out in the programme is around 2.5% a year
based on strict application of the structural measures designed to boost
competitiveness and employment. However, it might be lower. For nearly a
decade, activity in Greece was artificially boosted by the low interest rates
linked to eurozone membership. Soaring public and private debt fuelled an
unsustainable level of GDP growth driven by domestic demand. The present
changeover to growth driven by supply and exports could result in a
permanent loss of activity: the businesses currently closing down in Greece
may never reopen thereby leading to a rise in structural unemployment and a
downward revision of the country’s potential growth.
The risks to growth are closely linked to those weighing on the fiscal
performance. The programme is based on the return to a primary fiscal
surplus in 2013 growing to 4.5% of GDP in 2014, remaining that large out to
2020. Although recent history shows that such an adjustment is possible 3, it
necessarily supposes a strong enough economic recovery to support the
cyclical improvement in public finances. After an impressive fiscal
consolidation of 5 percentage points in 2010, the fiscal deficit was reduced by
only 1.3 percentage points in 2011, to 9.3% of GDP. The brutal recession has
reduced the scope of the austerity measures. However, while Greece has
missed its target in terms of results it has also fallen short of the target in
terms of means employed. The government has not implemented all the
measures it undertook to implement. For example, the tax reform initially
scheduled for September 2011 has been postponed to June 2012.
The political uncertainty should be put into perspective
The results of the upcoming general elections (probably to be held in May) are
very uncertain. At the moment, no single party appears to be in a position to
win enough votes to govern alone. The opinion polls point to a very scattered
Parliament and the likely formation of a very mixed coalition whereas a great
deal depends on the future Greek government’s ability to implement the
measures provided for in the programme. However, the closer supervision,
with European auditors positioned permanently in Athens, reduces the relative
importance of this political uncertainty. Stricter control of the implementation
of the measures should pave the way for an improvement in the country’s
overall situation and, accordingly, ensure the eurozone’s financial support
over the long term.
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